Slowly, tech investment heats up

After one of the worst periods in history for financing startup companies, the frozen pipelines for funding have begun to thaw, according to Tech Coast Angels, a network of 250 “angel” investors in Southern California.

Tech Coast said this week that it completed seven rounds of new investment deals and 17 follow-on deals last year, including several from San Diego County. The group invested $4.7 million directly into companies, with $57 million coming from other sources.

Richard Sudek, who chairs Tech Coast, said the funding shows “there’s still a vibrant investment environment in Southern California.”

But the number of deals and the amount of available funds was lower in 2009 than 2008, another bad year for financing. And although the market appears to have hit bottom last summer, the hurdles for getting funding are still much higher than before the recession, and investors are pickier than they used to be.

“Things are looking better than last year, but that’s not saying much,” said Peter N. Townshend, partner at the law firm of McDermott Will & Emery, who represents companies going through the funding process. “I do think that we hit bottom last year and are probably on our way up, but we could see another dip unless the economy picks up.”

Michael Elconin, immediate past president of the local chapter of Tech Coast, said that while innovative cleantech and biotech firms still have a good chance of funding, investors are skittish about putting money into firms that look like they’ll need another round of funding before they get to their next stage of business development.

“Investing is still in a valley,” he said. “It reminds me of the period after the Internet bubble broke.”

But Elconin and Townshend agreed that for the right kind of company — one with an extraordinary product or service that sets itself apart from the rest of the market — there’s still a lot of funding available.

“For exceptional companies, this might be one of the best times to get funding,” said Townshend, who spent much of yesterday speaking at a seminar on venture capital sponsored by San Diego’s Connect, a nonprofit aimed at supporting local tech firms. “The fact is that there are fewer things to distract the VCs (venture capitalists). It’s the reverse of 1999, at the top of the Internet, where everyone was pitching their companies to the VCs and you practically couldn’t getting out of a taxicab without getting pitched. These days, the VCs are eager to fund a good company.”

Angel investors provide initial funding to help companies grow to the stage when they can attract funding from VC funds, which then generally prepare the company for a stock offering or a merger with a bigger firm. Local companies that have received funding by Tech Coast Angels over the past year include:

• MicroPower Technologies, which has developed what it bills as “the world’s most power-efficient wireless camera.”

• Loop’d Network, a social networking site for action sports athletes and fans.

• Amplyx Pharmaceuticals, which is developing a technology to improve and extend the life of small molecule drugs.

• Benchmark Revenue Management, which helps hospitals run more efficiently.

Bob Ehlers, who oversees business development at MicroPower, said “it’s much more of a challenge getting VCs to participate in financing these days,” although his company has so far not had any trouble attracting investors to its second round of financing, since it hit all the targets set during first round, such as getting patents and building prototypes.

In a healthier market, Ehlers said, MicroPower might by now be seeking funding from a venture capital company. But because of the weak financing environment, the company won’t seek venture capital until summer, which is why it sought additional money from Tech Coast.